Bonus Cuts Hurting More Than Top Wall Streeters

Matt Richtel, The New York Times

Thursday, 19 Feb 2009 | 6:33 AM ETThe New York Times

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It is not just Wall Street executives who banked on receiving year-end bonuses to support their lifestyles when the economy was booming. A more muted form of the bonus culture extends across the United States.

Millions of Americans, far removed from Lower Manhattan, count on receiving extra checks to help pay for cars, trips, home renovations, and school tuitions and summer camp for their children.

Now, in the 14th month of a deepening recession, smaller bonus checks are arriving, if they come at all, and are delivering diminished expectations.

Anthony Abraham, 33, a management consultant in Chicago, is already figuring he will not be buying a new car, and has canceled a trip to Paris and will be paying back less than planned on his student loans.

Last year, his bonus was around $50,000. This year, it will be half that amount, he figures, give or take a few thousand.

“It makes a real material difference,” said Mr. Abraham, who has a $135,000 base salary. His bonus has typically gone to basic lifestyle maintenance, not frivolity, he said, adding, “It’s not the kind of money where I could head down to the Ferrari dealership.”

To critics, including President Obama, the multimillion-dollar Wall Street bonuses have come to symbolize capitalist excess. For example, 700 Merrill Lynch employees divided $3.6 billion in bonuses, for an average of more than $5.1 million each, even though the brokerage firm lost $27 billion last year.

A provision in the $787 billion stimulus bill passed by Congress on Friday would prohibit cash bonuses for the five most senior officers and the 20 highest-paid executives at large banks that receive money under the Treasury Department’s bank rescue program. It would also bar other executives from receiving bonuses exceeding one-third of their annual pay.

Meanwhile, other workers’ bonuses are being scaled back because of business conditions. About 10 percent of workers nationwide receive annual bonuses, according to the Bureau of Labor Statistics. They are awarded in widely varying amounts, and at companies big and small. For instance, 14 percent of employees at companies with fewer than 99 workers get some extra year-end compensation, the federal agency said.

Companies of all sizes — and even many nonprofit organizations, like school districts — have adopted bonus systems for a variety of reasons: as a way to reward performance, to hold down base-pay levels, and to provide more flexibility to smooth out costs. And workers naturally enjoyed the smaller-than-Wall-Street windfalls when the economy was booming.

But such a system can also mean sharp swings in pay in a ravaged economy like this one. And the trickle-down effect can hurt prospects for restaurants, real estate agencies and other businesses that rely on discretionary purchases.

“People have begun to live as if bonuses were not bonuses at all but part of their expected annual income,” said Jay Lorsch, a professor at the Harvard School of Business. “When those bonuses don’t come through or are substantially reduced, people have to take it out of their lifestyles.”

Smaller bonuses mean another hit to the economy that is not reflected in some of the broadest measures of the nation’s health, like the growing unemployment figures that have become shorthand for the misfortunes of America’s workers.

In 2007, Jan Klincewicz, 50, was selling high-end corporate computers for Hewlett-Packard. He had a base salary of $87,000. His performance bonus was $143,000, and he used the proceeds to help buy a five-bedroom house outside of Philadelphia, a 65-inch high-definition television and a baritone saxophone.

In 2008, he switched to another company, Citrix Systems, where he hoped for a repeat performance selling software for high-end computers. His base salary was $108,000, but his bonus was only $24,000. He is not sure what the future holds, given the rough economy.

“I shop for bargains,” he said.

Across the country, bonuses are structured in many different ways. Some firms pay them based on individual performance or some combination of individual and corporate performance. And some regions and industries have their own peculiar bonus-pay cultures.

In Silicon Valley, performance-based compensation can come in sales commissions, as it does for Mr. Klincewicz. But more typically, people there get stock-option incentive packages that are not paid at year-end but can be cashed in by employees after a certain period of time, assuming the stock has risen enough to make the options valuable.

Given the state of the stock market, the options returns are as meager as the year-end bonuses handed out elsewhere, according to Silicon Valley residents. Some of the local business are feeling the pinch.

At the Silicon Valley Auto Group, a dealership in Los Gatos that sells Rolls Royce, Bentley and Lamborghini cars, the least expensive costing $60,000, the sales manager, Matthew Griffin, said he was not expecting the usual bonus-generated bump in sales. But that is not entirely because his clientele cannot afford to buy.

“Is it the politically correct thing to do when you’re consolidating offices and laying off people to show up in a new $400,000 car?” he asked.